Good morning, my name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the Nokia Q4 2012 update call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then number one on your telephone keypad. To withdraw your question, press the pound key. If you are on a speakerphone, please pick up your handset before asking your question. I would now like to turn the conference over to Matt Shimao, Head of Investor Relations. Sir, you may begin.
Hello and thank you for joining us for today's conference call. I'm Matt Shimao, head of Nokia Investor Relations. Stephen Elop, President and CEO of Nokia, and Timo Ihamuotila, CFO of Nokia, are here in Espoo with me today. During this call we'll be making forward-looking statements regarding the future business and financial performance of Nokia and its industry. These statements are predictions that involve risk and uncertainties. Actual results may therefore differ materially from the results we currently expect. Factors that could cause such differences can be both external such as general economic and industry conditions as well as internal operating factors. We have identified these in more detail on pages 13 through 47 of our 2011 Form 20-F and in our financial performance related press release issued today. With that, Stephen, over to you.
Thank you for joining us for an update on Nokia's fourth quarter 2012 outlook and our perspective as we start the first quarter of 2013. We are encouraged that we made good progress in both devices and services and in NSN as we continue to manage through tough transitions in both businesses. We are pleased that our solid execution against our strategy enabled us to exceed expectations. We now estimate that our Non-IFRS devices and services operating margin in the fourth quarter 2012 was between break-even and +2%. This compares to our previous outlook of approximately -6% ±4 percentage points. In devices and services, our mobile phones business unit and our Lumia products both delivered better than we expected. We also saw lower than expected operating expenses in Q4 as we performed well against our restructuring plans and spent less than expected.
We did this all while delivering solid sales. In Q4 we sold a total of 14 million Asha smartphones and Lumia smartphones. We are pleased with the initial consumer response to our new Lumia devices during our early ramp-up period which also experienced some supply constraints. Moving forward we remain focused on ramping up Lumia shipment volumes and reaching new markets. I'm also pleased to report record results for NSN. We now estimate that NSN's non-IFRS operating margin in the fourth quarter 2012 was approximately between 13% and 15%. This compares to our previous outlook of approximately +8% ±4 percentage points. In NSN we saw more favorable product and regional mix than expected. NSN also performed well against the restructuring plans delivering better than expected reductions in operating expenses and production overheads.
Importantly, Q4 2012 marks NSN's third quarter in a row of underlying profitability, and while we expect seasonality to impact the first quarter of 2013, we are pleased with NSN's strong execution of its strategy focused on mobile broadband. In the press release we just issued, we also provided preliminary guidance for Q1 2013. In short, Q1 is a seasonally weak quarter for both devices and services and NSN, and we remain in the midst of transitioning both businesses. Additionally, as we have said previously, we continue to operate in a competitive environment with limited visibility. Overall, we are pleased with the progress that Nokia made in Q4. Our team is aligned with our top priorities, and we are encouraged that these efforts started to translate into financial results so we can emerge from our transition as a more agile and focused competitor.
With that, I will turn the call back over to Matt for Q&A.
Thank you, Stephen. For the Q&A session please limit yourself to one question only since we intend to end this call at the top of the hour. We will have a full Q&A session after we publish our full results on January 24th. The purpose of today's Q&A session is to be available only to clarify the preliminary information we released today. Operator, please go ahead.
At this time, I would like to remind everyone, in order to ask a question, press star then number one on your telephone keypad. Your first question is from the line of Stuart Jeffrey with Nomura.
Good morning and congratulations. Just a quick one. Could you just give a bit more detail as to the role of the Asha Touch versus the Lumia in the strength that you've seen in the quarter? And perhaps also touch on some of the production constraints. You mentioned there are production constraints around the Asha Touch but I'm not sure if there were any around Lumia so perhaps you could expand on that. Thank you.
So thanks Stuart, Timo here. So, maybe I'll start, so and the first one was on the role of Asha versus Lumia. I mean we said that one of the drivers was that both the mobile phones business unit as well as our Lumia business did better and of course you saw the volumes as well on Asha with over 9 million and Lumia 4.4 million so clearly both were contributing.
Stuart, with respect to supply constraints we were principally referring to supply constraints on the Lumia product line particularly on the 920. So that is something that absolutely affected what took place during Q4.
Thank you Stuart. Operator, next question please.
Your next question is from the line of Andrew Gardiner with Barclays.
Thanks very much for taking the question. I had a question regarding the improvement in margins you've seen in devices and services. Can you give us any steer as to how much of that improvement was related to OPEX cuts relative to the gross margin improvement? In particular around gross margin, you had taken a hit earlier in 2012, sort of writing off products. I was just wondering whether is any of that actually sold through and you're seeing a any one-time benefit from that or is there you know, what's the underlying organic improvement in gross margin? Thank you.
Okay, Timo here. Thanks for the, for the question. So, first of all, fortunately regarding the gross margin we are not giving any detail now on the gross margin so the more specific gross margin questions we need to answer when we report on the 24th. But regarding the Non-IFRS operating margin as we mentioned OPEX was more of a driver than we thought when we went into the quarter and in that sense yes, that is clearly impacting the improved operating margin estimate. And then regarding the allowances so again we did not say anything about it but we tried to call any really bigger impactful drivers out and we did not call out allowances at this point in time.
Thank you. Operator, next question please.
Your next question is from the line of Gareth Jenkins with UBS.
Yes, thanks for taking the question. Just a quick one on Lumia momentum into the new year, and you know, I guess we've seen a little bit of price discounting. Whether you can comment on the sort of pricing environment and competition into the, into the first quarter. Thank you.
Yeah, I mean I can't predict, you know, first quarter and how things evolve specifically competitively but in general this has not been a price discounting environment for Lumia products. We're in the very early stages of the launch in a supply-constrained environment. As you see prices perhaps move in various markets, it's important to note that other parties may be making decisions to drive traffic or to, you know, encourage certain behaviors amongst their customers. But from a Nokia perspective broadly speaking it has not been a price discounting environment. And as well, just to say it more positively, we've been very pleased with the consumer response we're seeing. We're dealing with the supply constraints and so forth so it's had a very positive reception and we're pleased with that.
Thank you Gareth.
Oh, if I may add to that. So I think it's important to note though that some of the pricing actions as we said earlier which we took already during earlier part of Q4 on some of the Windows Phone 7.5 products are playing into the numbers regarding Q4.
Yep. Thank you.
Operator, next question please.
Your next question is from the line of Simon Schaefer with Goldman Sachs.
Thanks so much. I'm actually wondering on NSN, obviously a significant margin beater. Can you just elaborate as to what the mix effects are? Is that a sign of the overall market or some specific remix effects that you still see in Korea and Japan? And does that mean that your structural goal in terms of margin is changed or are you just tracking just a little bit above normalized expectations? Thanks.
Okay, thanks for thanks Simon. So, as we said, regarding the drivers for NSN so we have both positive product mix and also regional mix but, but the product mix is a bigger driver at this point. And in addition it's important to note that NSN has made really good progress on its restructuring program both regarding OPEX management as well as on cost of sale side. And, we need to remember when we look at NSN that, their restructuring on the services business is actually showing on the cost of sale so that's also basically then part of the, gross margin line.
The previous, long-term non-IFRS operating margin guidance we've given was 5%-10% and we have not updated that.
Yeah, that's correct.
Operator, next question please.
Your next question is from the line of Mark Su with RBC Capital Markets.
Thank you. Gentlemen, maybe how should we think about the changing landscape as it relates to Apple and others moving down market and the impact to Nokia particularly in the area where you've been actually seeing better results? And then Timo maybe just very quickly just an early look on the balance sheet, working capital requirements, and what your cash position might look like near term.
So I'll comment on the first. With respect to the changing landscape, it's changing only in that competition continues and we're very confident in our ability to produce products that are very competitive. We clearly have some great strengths in terms of distribution, in terms of brand recognition, and particularly in emerging markets, and we're pleased with the ability to compete.
Yeah, and regarding the balance sheet, we will turn into the cash flow related questions then when we report our quarterly and also full year numbers on the 24th of January.
Thank you Mark. Operator, next question please.
Your next question is from the line of Sandeep Deshpande with J.P. Morgan.
Yeah, hi. Can you possibly comment on the rollout of the Lumia? I mean, is this been mostly in the developed markets and are we going to still see big volumes coming through in terms of volumes on the Lumia 900, 920 in the first quarter from emerging markets where you're probably pushing it through now?
So we did deliberately begin in certain markets with certain operators, and so it was our strategy to start very deliberately in a constrained environment. So we've begun that. Those environments, as we described, have been supply-constrained in Q4. We do continue with the process of managing demand and supply as now in Q1 we begin to introduce into additional markets. So it was only very late in Q4 that we began in China. I think it's just today that we are beginning in India. So we still have some markets that are being added, but of course at the same time, particularly around the 920, we're having to manage demand and supply very carefully as we go forward. And that'll be an ongoing theme during Q4, or sorry, during Q1.
Thanks Sandeep. Operator, next question please.
Your next question is from the line of Alexander Peterc with Exane BNP Paribas.
Yes, hi. Thanks for taking my question. Just like to understand whether you still have any supply issues for the Lumia 920. When do you expect them to go away completely and can is your guidance making in any sequential growth for the Lumia spectrum of devices into Q1? Thanks.
With respect to supply constraints we are still dealing with those constraints. Obviously we're addressing them, improving them, and so forth but I can't give you a precise forecast on how those play out or take place during the course of the quarter. I don't think we're not providing any forward guidance at this point as it relates to Lumia volumes and so forth so I can't really respond to that.
Yeah, that's correct. Maybe, maybe Alexander, we can talk a little bit about the dynamics in SD sort of in general during Q4. So if you look at, we had 4.4 million Lumia volume that includes significant amounts of both 7.5 products as well as 8 products. And also then we had 2.9 million or sorry, yeah, 2.9 million, Symbian products. Two, sorry, 2.2 million Symbian products. And I think it's worth noting that now going into Q1 we expect that Q4 is probably the last quarter where we have a meaningful Symbian volume when we look at the devices and services numbers overall so that will also have an impact going into, into Q1 from Q4.
Thank you Alexander. Operator, next question please. Hello Operator, can we have the next question please?
Yes, your next question is from the line of Didier Scemama with Merrill Lynch.
Yeah. Good afternoon, gentlemen. My question is regarding the geographic mix of Lumia devices. You just touched on it, Timo, a little bit, but when I look at the numbers printed the last few days by Verizon, AT&T, it doesn't feel like Windows Phone was a huge success in North America. So if you could just clarify, you know, the regional dynamics of Lumia, that'd be great. Thank you.
Yeah, in terms of the way to think about it regionally, essentially talking particularly about the 920 wherever we were shipping it, we were in supply constraints. So it's a bit hard to judge, you know, the regional mix and how it could have been or what it should have been and so forth. But certainly, for example, AT&T and the 920 had significant supply issues with us during the course of the quarter, and that's been the theme throughout. Indeed, just in the last couple of days, I've been in Italy, I've been in Germany, and those are very much top of mind conversations with the operators in those markets as well. And so it is the case that the success that we're seeing to date, particularly around the 920, has been primarily capped, if you like, by the supply situation.
Thank you Didier. Operator, next question please.
Hold on. Your next question is from the line of Jim Suva with Citi.
Thank you and congratulations to you and your team there at Nokia. When we look at the supply constraints and Nokia is very well known as, you know, a known company that does very well with managing the supply as well as its distribution. Can you walk us through a little bit about how these supply constraints evolved? Was it maybe a little bit more conservative Lumia forecast to begin with? Was it more the chip suppliers or the panel suppliers being a little more cautious on the potential success of it or was it just, you know, demand just being much, much stronger than Nokia anticipated? Thank you.
So the way, you know, I think this develops first of all. As we went into this launch, we were very deliberate and thoughtful about how to get it going, get the early momentum, make sure that we're not significantly oversupplying relative to demand, you know, being obviously in a turnaround situation and being very thoughtful about resource management, cash management, and so forth. So all of those considerations came into play. And of course there are some stresses in the industry around certain components and so forth. So it was essentially a blend of all of those types of things. So, you know, we anticipated that if the product really began to run the 920 we could run up against those constraints.
We've clearly hit those constraints and now we're working with our suppliers and of course with the various operators and so forth to manage through that situation today.
Thank you Jim.
Thank you very much.
Operator, next question please.
Your next question is from the line of Pierre Ferragu with Bernstein.
Hi, thank you for taking my question. A very simple one. Could you give us a sense of what the mix was between Windows 7, 7.5, and 8, Lumia, and in what surprised you positively in this quarter? Was there anything around that? Did Windows 8 ramp up faster than you thought and did Windows 7 Lumia resist better or is it coming down very fast? Thank you.
Thanks for that question, Pierre. We're not actually disclosing the number or the precise mix, but let me make a few comments. First of all, the reason we're taking that approach is because the overall strength is very much around, or the overall strategy is very much around the whole ecosystem. It's important to note that at the same time that we're introducing the first Windows Phone 8 devices, we still in the quarter introduce two brand new Windows Phone 7 devices for certain markets, particularly at lower price points. So calling out the mix as some sort of indicator of progress and everything, we think, isn't the right leading indicator. It's about the health of the ecosystem overall. That being said, we expect Windows Phone 7 broadly to decline over time as Windows Phone 8 accelerates.
I would say that the biggest positive news that we saw here was around our flagship product the Lumia 920, the supply constraints, and so forth. That was the driver for us in terms of the positive feedback we're getting.
Thank you, Pierre. Operator, we'll take our next question. Mark, please.
Yes, your next question is Richard Kramer from Arete Research.
Yeah, thanks very much. A couple quick ones. One is, Timo, you talked before about the difference in profitability between the Symbian and the Lumia devices. Can you maybe elaborate how much of the improvement in profitability this quarter came from Symbian having its last time buy, or sort of last time production? And, equally, Stephen, I think you've talked about having a certain overall market share as being sort of viable for both the Windows Phone ecosystem and for Nokia. And yet it's still a far cry from that. Can you give us a sense, looking into next year, of just how aggressively you feel you need to ramp volumes in WinPhone to reach a sort of critical mass market share? Thanks.
Okay. Thanks, Richard. So, first of all on Symbian and Lumia, as we are not really giving gross margin at this point and, this we talk more about that in the 24th so I, I don't think I can give anything on that split. But I think it's worth noting that again we called out Lumia performance and mobile phones business unit performance as drivers for the exceeding our earlier given margin and in that sense we did not call Symbian out in, in that regard.
And then with respect to, you know, progress against market share targets and so forth, you know, the way I think about that is we have to make steady progress quarter on quarter on quarter. And obviously getting off to a good start with Windows Phone 8 was important, you know, in that journey and I think the results today reflect the fact that that first step is something that we're quite pleased with. I think it's also worth pointing out that this sense of momentum around broadly the Windows ecosystem, particularly with what you're seeing with Windows Phone 8 and some of what the operators are seeing and so forth, I think further supports their interest in the, you know, the investment in the third ecosystem, the desire to strike a different balance amongst the major players in the mobile industry and so forth.
Over the course of the last, you know, seven or eight days I've met quite a number of the leaders of major operators around the world, and that's a very common topic of conversation: how to build on what's been started and how to really strike a strategic balance for consumers and also for them in terms of the choice that's available.
And maybe to add to that there is no change in our thinking regarding the ecosystem market share and our aim to get the ecosystem market share into 10%.
Yeah.
Or more. So we have spoken about that as a longer term market share target for the Windows Phone ecosystem and, of course we want to be the major player in that ecosystem.
Thank you Richard. Operator, next question please.
Your next question is from the line of Jeff Kvaal with Barclays. Jeff, your line's open. Please go ahead. Okay, we'll move to the next question and it's from the line of James Fawcett with Pacific Crest.
Thank you very much. Just wanted to ask if maybe you could contrast a little bit about with the launch of the Lumia 800 last year. Seems like roughly a similar type volume for the new products this year versus last year. But last year then you seemed to stumble a little bit. Now you seem to have multiple carriers and market still ahead of you to launch and ramp. Just wondering if you can elaborate a little bit on what you feel like you've done differently now and the learnings have been and how we should think about that extrapolating it into the future.
Yeah, I think what we set out to do differently here and you can clearly see it in how we went to market is, well, let's just take Europe as an example. When we launched the Lumia 800 in the very opening days or weeks of the 800 launch in Europe, we essentially had it going at most major operators in most major countries. Other countries followed, you know, in the weeks thereafter. But we have been very deliberate and selective in this launch. And so in a much smaller number of countries initially and within each country quite often with just a select operator or two, select retailer or two. And we did that quite deliberately so that we could concentrate resource.
So that we could, you know, establish a combined effort where for example with a greater contribution of marketing from ourselves, attracting a greater contribution from a particular operator or retailer partner and so forth, we could get some real focus and real sense of momentum going there before we took it to additional countries or broadened it within countries where we've already started and so forth. And so we took that approach believing that with those significant investments we could, we could, you know, get more traction.
So I'll use AT&T as an example where, you know, clearly from a marketing perspective be it in advertising or be it in subsidy dollars attracted which therefore affects the price that consumers see, all of those things can be combined together to have a very powerful offer in the marketplace, a very innovative device at a very aggressive price, well, well positioned, well advertised with the salespeople well trained. So that's a good first step. Now what we have to do is not only broaden distribution, address the supply constraints but we also have to continue to improve the ongoing sustenance of the products. We have to make sure that the retail sales reps continue to see, you know, fresh offers, fresh opportunities to present the product, new applications, those types of things so that it moves beyond just the initial launch and into a more sustained level.
In other words, we have to establish, you know, yes, get through the launch but get to a point where you've established a new run rate, a new sort of way that things play out over the longer period of time as we go into the next series of launches and various other things that hopefully will step function us up further and further.
If I may comment just very quickly. So of course it's very, very early days and as Stephen said earlier we are still operating with limited visibility. But when we compare to 800 I would have say as a 920 user that there is also new innovation in the product clearly around the camera, wireless charging, and so forth and we should not discount that part. But again, very early days and as I said we are operating with limited visibility.
Thank you James. Operator, next question please.
Your next question is from the line of Per Lindberg with ABG.
Yes, thanks so much and congratulations on the turnaround which seems to be coming your way. Can you perhaps also address the issue of cash if that is a topic you would like to comment on? You don't say anything about the cash flow. Can we assume that cash before restructuring has broadly tracked your non-IFRS trajectory?
Well, thanks Per for that. So of course we are now talking about the non-IFRS operating margin and are excluding the restructuring. So no, not really. We are not talking about the cash situation or balance sheet in this call and we will return to those topics when we talk more about the overall Q4 results and the full year 2012 results on the 24th.
Thank you.
Operator. Thank you, Per. Operator, we will now take our last question for today.
Thank you. Today's final question will come from the line of Andrew Humphrey with Morgan Stanley.
Hi, thanks for taking my question. I wonder, could you quantify any one-offs that may have impacted margin during the quarter either for NSN or for the devices and services business? I'm thinking, you know, either inventory write-downs or, you know, last quarter clearly there was a presale of intellectual property, royalties going forward. Anything like that would be useful. Thank you.
Yeah, thanks Andrew. Timo here. So I think we called out devices and services EUR 18 million of IPR income and in NSN also EUR 30 million of IPR income. We did not call any additional items regarding any possible inventory allowances and so forth. So it was really those two both related to IPR.
Okay, good. So if I could just close the call, I just want to share that we definitely are looking forward to sharing more details on January 24th, but in summary, I wanted to note that while we experienced greater than expected challenges in the first half of the year that's, that's just ending, the Nokia and NSN employees have responded to the situation and we continue to manage it through the difficulties that we face. We're very focused on ramping up our sales and continuing to control costs so we can move through our transition and deliver more value to shareholders. Thank you all for joining us on this call on short notice.
Ladies and gentlemen, this concludes our conference call. I would like to remind you that during the conference call today we have made a number of forward-looking statements that involve risk and uncertainties. Actual results may therefore differ materially from the results currently expected. Factors that could cause such differences can be both external such as general economic and industry conditions as well as internal operating factors. We have identified these in more detail on pages 13 through 47 of our 2011 Form 20-F and in our financial performance related press release issued today. Thank you.
Ladies and gentlemen, thank you for joining today's call. You may now disconnect.